LOR Leased to LEE a Computer That Cost LOR $20,000

LOR leased to LEE a computer that cost LOR $20,000.The explicit interest rate is 20%; rentals are
paid at each year-end; and the lease term is three years.Residual value at the end of the lease term is
$2,000.Assume a direct financing lease.

Requirement 1:
LEE retains the computer at the end of the lease term at a BPO cost of $1,500.
(a)The rental amount computed by LOR is $ _.
(b)The amount LEE should capitalize is $ _.

Requirement 2:
How much interest should be recognized at the end of year 1, in the above situation, by: (a)LOR?
$________ (b)LEE? $________

Requirement 3:
At the end of year 1, in the above situation, how much would the principal be reduced for (a)LOR's lease receivable?
$ and (b)LEE's lease liability?
$________.

Correct Answer:

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Requirement 1:
(a)


(b)The a...

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